In American Express Co. v. Italian Colors Restaurant, a divided Supreme Court today reversed the Second Circuit andheld that plaintiffs may not invalidate an arbitration agreement containing a class action waiver merely because proving their claims on an individual basis would cost many times more than their potential recovery. In doing so, Justice Scalia, writing for the five-member majority, gave this characteristically harsh assessment: “The FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims.” This decision cuts off avenues that federal and state courts have used to invalidate class waivers in arbitration agreements, but does not totally do away with the “effective vindication” line of cases.

The Majority

In this case, a putative class of merchants claim that American Express violated federal antitrust laws (the Sherman and Clayton Act). Their agreements with AmEx stated “[t]here shall be no right or authority for any Claims to be arbitrated on a class action basis.” The agreements also precluded any joinder or consolidated actions. AmEx moved to compel individual arbitration. The district court granted the motion, but the Second Circuit reversed. Under the line of Supreme Court cases establishing that an arbitration agreement could be invalidated it if prevented the effective vindication of federal statutory rights, the Second Circuit found the plaintiffs had proven that the costs of arbitrating antitrust claims individually (due largely to the requirement of expert economic analyses) was prohibitive.

The Supreme Court reversed, not by declaring that the entire line of “effective vindication” cases were dicta or overruled (Mitsubishi Motors, 14 Penn Plaza, Gilmer, and Green Tree), but by narrowing its application. From now on, the doctrine only applies if the plaintiffs “right topursue” federal statutory remedies is prevented, not if the cost to prove those federal statutory claims makes them irrational to pursue. As examples, Scalia noted that arbitration clauses outright forbidding certain statutory claims would still be precluded by the “effective vindication” doctrine, as would clauses that involve prohibitively high “filing and administrative fees” in the arbitral forum.

Scalia also directly addressed the interplay between the Concepcion decision (finding California case law invalidating class action waivers in consumer arbitration clauses was preempted by the FAA) and this case by saying Concepcion “all but resolves this case.” Why? Because it “rejected the argument that class arbitration was necessary to prosecute claims ‘that might otherwise slip through the legal system.’”

The Dissent

Justice Kagan authored a sharply worded dissent on behalf of herself, Justice Ginsburg, and Justice Breyer. The dissent focuses on the practical impact of the decision: “the monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse.” In the course of the dissent, Kagan takes on Scalia’s view of the FAA as intended to rigidly enforce agreements to arbitrate. Instead, she writes, the FAA “reflects a federal policy favoring actual arbitration—that is, arbitration as a streamlined ‘method of resolving disputes,’ not as a foolproof way of killing off valid claims. Put otherwise: What the FAA prefers to litigation is arbitration, not de facto immunity.” (internal citation omitted)

The dissent concludes that AmEx’s arbitration clause falls squarely within the “effective vindication” line of cases and should be invalidated, because it precludes not only class arbitration but any type of consolidation or joinder which would make it economically rational for plaintiffs to pursue their antitrust claims.

The dissent also disagrees with the majority’s application of Concepcion to this case. It notes that not only did Concepcion never cite any of the effective-vindication cases, the plaintiff in that case could feasibly vindicate her claim in individual arbitration, and the case was about federal preemption of a state law. “Our effective-vindication rule comes into play only when the FAA is alleged to conflict with another federal law, like the Sherman Act here.”

Import

In this decision, the Supreme Court continues its recent trend of eliminating legal bases for invalidating arbitration agreements. This decision will encourage more and more companies to add waivers of class and consolidated proceedings into their arbitration agreements, knowing that those waivers are likely to be strictly enforced.

Going forward, putative class plaintiffs who want to rely on the “effective vindication” doctrine to keep federal statutory claims in court must focus on their inability to assert those claims at the beginning of an arbitration – by an unreasonable statute of limitation or a prohibitive filing fee. Arguments relating to the costs of “proving” the claims are irrelevant.

What does this decision do to case law in states like Massachusetts, which recently adopted “effective vindication” as a matter of state law? I think the broad language of the majority’s ruling–including its comment that Concepcion controls the outcome by establishing that “the FAA does…favor the absence of litigation when that is the consequence of a class-action waiver, since its ‘principal purpose’ is the enforcement of arbitration agreements according to their terms”–is strong evidence that those state decisions are preempted by the FAA. This decision could lead to another string of state law decisions falling like dominoes on preemption grounds.

Finally, what can parties do who are concerned, like the dissenting Justices, about adhesion contracts essentially insulating large companies from all sorts of claims through their arbitration agreements? With respect to federal statutes, the only avenue is to appeal to Congress (until the dissenters become a majority of the Supreme Court). Justice Scalia’s opinion reiterates that the only real way to protect the right to bring a class action under a federal statute (or the right to proceed in court at all) is for Congress to expressly override the FAA. Therefore, if DOJ feels strongly that antitrust claims do not belong in arbitration, it should ask Congress to amend the antitrust statutes to expressly allow court actions, regardless of the parties’ contract terms. Good luck.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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